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If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Everyman Media Group (LON:EMAN), we don't think it's current trends fit the mold of a multi-bagger.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Everyman Media Group, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0047 = UK£792k ÷ (UK£192m - UK£23m) (Based on the trailing twelve months to June 2024).
Therefore, Everyman Media Group has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Entertainment industry average of 12%.
Check out our latest analysis for Everyman Media Group
In the above chart we have measured Everyman Media Group's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Everyman Media Group .
What Does the ROCE Trend For Everyman Media Group Tell Us?
When we looked at the ROCE trend at Everyman Media Group, we didn't gain much confidence. To be more specific, ROCE has fallen from 2.5% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
What We Can Learn From Everyman Media Group's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Everyman Media Group is reinvesting for growth and has higher sales as a result. But since the stock has dived 81% in the last five years, there could be other drivers that are influencing the business' outlook. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.
One more thing to note, we've identified 1 warning sign with Everyman Media Group and understanding this should be part of your investment process.